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Cement stocks trade lower after UltraTech lines up Rs 12,886-crore capex plan

Ultratech Cement on Thursday announced a 22.6mtpa increase in its grinding capacity via a mix of brownfield and greenfield .

June 03, 2022 / 10:14 AM IST
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Shares of cement firms on Friday were trading lower after UltraTech approved a capital expenditure of Rs 12,886 crore to increase its capacity. The development came after last week Adani group announced to buy a stake in Holcim.

Ultratech Cement fell 2 percent, Ambuja Cement 0.3 percent, ACC 0.7 percent, India Cement 0.1 percent, Shree Cement 1.7 percent, Ramco Cements 3.1 percent, JK Lakshmi Cement 0.1 percent, Dalmia Bharat 3.7 percent and JK Cement slumped 2.5 percent.

The race to expand capacity comes as the government plans to spend a record Rs 7.5 trillion this year to build roads and ports to boost growth.

UltraTech Cement on Thursday announced a 22.6mtpa increase in its grinding capacity via a mix of brownfield and greenfield . The investment will be done through a mix of debt and internal accrual. Although the expansion plant has not specified any locations for these expansions, analysts expect the clinker plants to be set up across regions.

"We expect a clinker capacity expansion of 16mtpa. UltraTech Cement may set up four clinker plants of 12,000tpd, or five plants of 10,000tpd each," Motilal Oswal Research said.  This expansion will help to achieve a domestic grey cement capacity of 153.5mtpa by FY25. Grinding capacity expansion of 16.3mtpa is already underway (to 130.9mtpa by Mar’23 from 114.6mtpa).

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Analysts also worry due to margin pressure amid rising input cost in the first half of fiscal year 2023 as the demand is slowing down in May and will witness monsoon soon. This will result in cement firms reporting lower volumes sequentially in the first quarter of FY23.

Citigroup in a note said that the lack of strength in deciding pricing trend could hurt smaller cement manufacturers. It also observed a growing possibility of mergers and acquisitions in the space, especially after the Holcim deal by Adani Group, and UltraTech's expansion - both through brownfield and greenfield. The latest capex ensures Birla Group remains the biggest producer of cement in India.

Cement firms are already under pressure due to elevated coal prices and the full impact of this likely to show in the current fiscal year. Despite increasing cement prices in April analysts expect it is not sufficient to cover the higher input cost. The inability to pass-on cost fully to customers remains the primary concern.

" While we are not changing our long-term positive view on the sector, we expect Cement stocks to underperform in the near-term, given: the sustained increase in energy costs, the entire impact of which should be felt in first half of FY23; the near-term weakness in demand (channel checks indicate a volume decline of 15 percent QoQ in 1QFY23 v/s a fall of 8-9 percent QoQ historically); and the partial rollback of the price hikes in May 2022," Motilal Oswal Securities report added.

Recently, many cement firms announced capacity expansion plans.  Shree Cement had earlier said it will double capacity over the next five-to-six years. However, it has not been very aggressive in placing orders over the last two years. Few other players like Orient Cement, Birla Corp, JSW Cement, and Dalmia Bharat have indicated their capacity expansion plans.
Moneycontrol News
first published: Jun 3, 2022 10:01 am
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